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Interest Rate Setting on the Swiss Franc Repo Market

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  • Sébastien Kraenzlin

Abstract

Repurchase agreements (repos) are secured money market transactions. The cash taker provides collateral in the form of securities and in return receives money from the cash provider. To ensure the continuous covering of the cash amount, the definition of eligible collateral, its handling and valuation play an important role. This is mainly because the collateral nearly eliminates credit risk. In Switzerland, Swiss franc repos are almost exclusively conducted via the highly standardized repo platform, with four different pre-defined collateral baskets. Each basket comprises different security categories, such as government bonds or covered bonds. This paper analyzes the interest rate setting on the repo market with data from June 1999 to June 2005. It evaluates, among others, if the securities provided as collateral influenced the repo rate or not. Surprisingly, a price differentiation with respect to the collateral provided is found. Consequently the paper provides an explanation for this finding and discusses a possible solution.

Suggested Citation

  • Sébastien Kraenzlin, 2009. "Interest Rate Setting on the Swiss Franc Repo Market," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 145(III), pages 351-377, September.
    • Handle: RePEc:ses:arsjes:2009-iii-4
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    References listed on IDEAS

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    1. Thomas J. Jordan & Peter Kugler, 2004. "Implementing Swiss Monetary Policy: Steering the 3M-Libor with Repo Transactions," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 140(III), pages 381-393, September.
    2. C. H. Furfine, 1999. "The pricing of bank lending and borrowing: evidence from the federal funds market," BIS Working Papers 62, Bank for International Settlements.
    3. Ángel León & Francis Benito & Juan Nave, 2006. "Modeling The Euro Overnight Rate," Working Papers. Serie AD 2006-11, Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie).
    4. Sébastien Kraenzlin, 2007. "The characteristics and development of the Swiss franc repurchase agreement market," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 21(2), pages 241-261, June.
    5. Michael J. Fleming & Kenneth D. Garbade, 2004. "Repurchase agreements with negative interest rates," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 10(Apr).
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    Citations

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    Cited by:

    1. Sébastien Kraenzlin & Martin Schlegel, 2012. "Demand for Reserves and the Central Bank's Management of Interest Rates," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 148(IV), pages 531-555, December.
    2. Dr. Silvio Schumacher, 2016. "Networks and lending conditions: Empirical evidence from the Swiss franc money markets," Working Papers 2016-12, Swiss National Bank.
    3. Prof. Dr. Sébastien P. Kraenzlin & Benedikt von Scarpatetti, 2011. "Bargaining Power in the Repo Market," Working Papers 2011-14, Swiss National Bank.
    4. Fuhrer, Lucas Marc, 2018. "Liquidity in the repo market," Journal of International Money and Finance, Elsevier, vol. 84(C), pages 1-22.
    5. Dr. Basil Guggenheim & Prof. Dr. Sébastien P. Kraenzlin & Dr. Christoph Meyer, 2020. "(In)Efficiencies of current financial market infrastructures - a call for DLT?," Working Papers 2020-24, Swiss National Bank.
    6. Basil Guggenheim & Sébastien Kraenzlin & Christoph Meyer, 2022. "(In)efficiencies of current financial market infrastructures: an empirical assessment," Swiss Journal of Economics and Statistics, Springer;Swiss Society of Economics and Statistics, vol. 158(1), pages 1-11, December.

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    More about this item

    Keywords

    Repurchase Agreement; Repo; Monetary Policy; Panel Data Econometrics; Collateral; Switzerland;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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